The govern­ment as ven­ture cap­i­tal­ist

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The Amer­i­can pub­lic’s at­ti­tude to­ward govern­ment, es­pe­cially to­ward the federal govern­ment, re­calls a clas­sic scene in Monty Python’s “Life of Brian.”

“What have they ever given us in re­turn?” ful­mi­nates John Cleese, play­ing a Judean rev­o­lu­tion­ary. “The aque­duct,” con­cedes a sheep­ish co-con­spir­a­tor. “And san­i­ta­tion,” says a sec­ond, as oth­ers pipe up with more ex­am­ples.

“All right,” Cleese erupts in ex­as­per­a­tion. “But apart from the san­i­ta­tion, the medicine, ed­u­ca­tion, wine, pub­lic or­der, ir­ri­ga­tion, roads, the fresh-wa­ter sys­tem, and pub­lic health, what have the Ro­mans ever done for us?”

The scene bril­liantly cap­tures Amer­ica’s can­tan­ker­ous and con­tra­dic­tory zeit­geist. On one hand, pub­lic trust in govern­ment is at an all-time low. On the other hand, Amer­i­cans are deeply frus­trated with gap­ing holes in health care, ed­u­ca­tion, equal­ity of op­por­tu­nity, in­fra­struc­ture, and en­vi­ron­men­tal pro­tec­tion – goods and ser­vices tra­di­tion­ally pro­vided by govern­ment. A re­flec­tion of this con­tra­dic­tory mind­set is a surge in pri­vate ac­tiv­ity to ad­dress so­cial prob­lems. These in­clude bil­lion-dol­lar ef­forts by non-prof­its like the Bill & Melinda Gates Foun­da­tion and Bloomberg Phi­lan­thropies to spur in­no­va­tive so­lu­tions in ed­u­ca­tion, pub­lic health, and poverty re­duc­tion. It is also re­flected in so­cial-en­ter­prise start-ups de­signed to achieve both so­cial and fi­nan­cial re­turns, as well as in new im­pact­in­vest­ing plat­forms aimed at the grow­ing num­ber of in­vestors who are also seek­ing both types of re­turns.

All of this is good news. The govern­ment’s ca­pac­ity to in­vest is un­der se­vere pres­sure. And, though many govern­ment pro­grammes deliver good value for money – Medi­care is a good ex­am­ple – far too many do not.

Peter Schuck’s new book Why Govern­ment Fails So Of­ten pro­vides a thought­ful, if pes­simistic, anal­y­sis. Govern­ment agencies are al­ways at risk of putting money into what Schuck calls “bad bets” and “bad ap­ples.” They are also in­her­ently rigid, risk-averse, and re­luc­tant to in­no­vate, be­cause they know that if they de­vi­ate from the let­ter of the law, or if an in­no­va­tion goes awry, they will be chas­tised po­lit­i­cally. And costly, in­ef­fec­tive pro­grammes are no­to­ri­ous for sur­viv­ing in­def­i­nitely be­cause they de­velop pow­er­ful de­fend­ers.

But blan­ket dis­trust in govern­ment, framed by glar­ing ex­am­ples of boon­dog­gles and fu­eled by ide­ol­ogy, too of­ten fo­cuses on the wrong ques­tion: How big should govern­ment be? The right ques­tion is how to de­velop in­no­va­tive and ef­fi­cient govern­ment pro­grammes to pro­vide pub­lic goods and ser­vices that nei­ther the mar­ket­place nor the non­profit sec­tor can deliver on its own.

One ap­proach is to put govern­ment in the role of ven­ture cap­i­tal­ist. Its task would be less to de­sign and im­ple­ment top-down so­lu­tions than to so­licit, sup­port, eval­u­ate, and scale up in­no­va­tive strate­gies by tap­ping into ideas de­vel­oped by state and lo­cal gov­ern­ments, businesses, and non-profit in­sti­tu­tions. This can hap­pen – in­deed, in the US un­der Pres­i­dent Barack Obama’s lead­er­ship it is al­ready hap­pen­ing – in many dif­fer­ent ways.

For ex­am­ple, the US Depart­ment of Ed­u­ca­tion’s Race to the Top Fund, which of­fered $4 bln in grants to states that de­vel­oped suc­cess­ful ed­u­ca­tional re­forms, spurred in­no­va­tions that hold prom­ise for school sys­tems across the coun­try. More broadly, prize com­pe­ti­tions to re­ward tar­geted in­no­va­tion and crowd-source new ideas of­fer a highly cost­ef­fec­tive op­por­tu­nity for govern­ment to lever­age its scarce re­sources for im­por­tant pub­lic goals. The federal govern­ment now op­er­ates Chal­, an In­ter­net plat­form to fa­cil­i­tate new com­pe­ti­tions. Some 50 pub­lic agencies have spon­sored more than 260 chal­lenges since 2011.

Af­ter the 2010 Deep­wa­ter Hori­zon oil spill in the Gulf of Mex­ico, the Obama ad­min­is­tra­tion teamed up with the XPrize Foun­da­tion to of­fer a $1.4 mln prize to the group that pro­duced the most ef­fi­cient oil­re­cov­ery so­lu­tion. The win­ning ap­proach, from Elastec Amer­i­can Ma­rine, was three times as ef­fi­cient as the in­dus­try’s pre­vi­ous best rate.

The United States’ Af­ford­able Care Act, which en­tered into force this year, con­tains fur­ther vari­ants on the idea of govern­ment as a cat­a­lyst, in­clud­ing in­cen­tives to re­ward health-care sys­tems that im­prove out­comes and re­duce costs. The in­cen­tives have spurred a num­ber of state-level ex­per­i­ments in Med­i­caid (Amer­ica’s health-in­sur­ance pro­gram for the poor) through waivers of the stan­dard rules.

Like­wise, the new federal So­cial In­no­va­tion Fund pro­vides grants to so­cial-sec­tor in­ter­me­di­aries – foun­da­tions, non-prof­its, and so­cial en­ter­prises – that de­velop new pro­grammes to tackle prob­lems like un­equal ed­u­ca­tional op­por­tu­nity. These grants are awarded on a com­pet­i­tive ba­sis, and fund­ing is con­tin­gent on achiev­ing mea­sur­able out­comes. Some state and lo­cal gov­ern­ments are ex­per­i­ment­ing with new “pay-for­per­for­mance” con­tracts – some­times called so­cial im­pact bonds (SIBs) – to pro­mote so­cial in­no­va­tion. In a SIB, the govern­ment con­tracts with an out­side provider to achieve a mea­sur­able so­cial goal (like re­duc­ing re­cidi­vism among ju­ve­nile of­fend­ers), pri­vate im­pact in­vestors fi­nance the pro­gramme’s up­front costs, and the govern­ment prom­ises a re­turn to them if the pro­gramme’s tar­gets are achieved.

Re­cently, the Obama ad­min­is­tra­tion pro­posed a $300 mln fund to catal­yse federal pay-for-per­for­mance con­tracts. Sev­eral ex­ist­ing federal pro­grammes like the Com­mu­nity Rein­vest­ment Act and the Small Busi­ness In­vest­ment Com­pa­nies pro­gramme are sup­port­ing the growth of im­pact in­vest­ing funds. Ac­cord­ing to a re­cent study, im­pact in­vest­ing in the US would not ex­ist with­out the sup­port of and part­ner­ship with the federal govern­ment through grants, loans, and guar­an­tees. Met­rics are an es­sen­tial fea­ture of pay-for-per­for­mance con­tracts, and must be an es­sen­tial fea­ture of all govern­ment pro­grammes. This is mostly not the case to­day, but the sit­u­a­tion is im­prov­ing as the Obama ad­min­is­tra­tion links more of its spend­ing to ev­i­dence of suc­cess, and as non­profit groups, like Amer­ica Achieves, de­velop so­phis­ti­cated new tech­niques to eval­u­ate govern­ment pro­grammes.

With the govern­ment act­ing as a ven­ture cap­i­tal­ist, the pri­vate sec­tor can cre­ate ef­fec­tive new pro­grammes to ad­dress so­cial prob­lems. But scal­ing up these pro­grams will re­quire govern­ment re­sources. The Gates Foun­da­tion may de­vise break­through in­no­va­tions for pub­lic schools; but, even with its bil­lions of dol­lars, it lacks the re­sources to re­vi­talise ed­u­ca­tion at the na­tional or even the state level. As for­mer New York City Mayor Michael Bloomberg re­cently ob­served, phi­lan­thropists should test in­no­va­tive pol­icy ideas and then rely on govern­ment money to im­ple­ment them widely.

Only gov­ern­ments can pro­vide pub­lic goods and ad­dress so­cial chal­lenges on a na­tional scale. But there are nu­mer­ous ways in which gov­ern­ments can work with non­prof­its, in­vestors, businesses, and cit­i­zens to find the best ways to achieve these goals – and thus re­store pub­lic trust in govern­ment it­self.

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